1. Suppose the following table reflects the domestic supply and demand for compact disks (CDs).
Price ($) 15 13 11 9 7 5 3 1
Quantity Supplied 8 7 6 5 4 3 2 1
Quantity demanded 2 4 6 8 10 12 14 1
(a) Graph these market conditions and identify the equilibrium price and sales.
(b) Now suppose that foreigners enter the market, offering to sell an unlimited supply of CDs for $7 apiece. Illustrate and identify (1) the market price, (2) domestic consumption, and (3) domestic production.
(c) If a tariff of $2 per CD is imposed, what will happen to (1) the market price, (2) domestic consumption, and (3) domestic production?

2. Alpha and Beta, two tiny islands off the east coast of Tricoli, produce pearls and pineapples. The production possibilities schedules in the table below describe their potential output in tons per year.
Alpha Beta
Pearls Pineapples Pearls Pineapples
0 30 0 20
2 25 10 16
4 20 20 12
6 15 30 8
8 10 40 4
10 5 45 2
12 0 50 0
Suppose the two islands agree that the terms of trade will be 1 pineapple for 1 pearl and that trade soon results in an exchange of 10 pearls for 10 pineapples.

(a) If Alpha produced 6 pearls and 15 pineapples and Beta produced 30 pearls and 8 pineapples before they decided to trade, how much would each be producing after trade became possible? Assume that the two countries specialize just enough to maintain their consumption of the item they export, and make sure each island trades the item for which it has a comparative advantage.

(b) Explain how much would the combined production of pineapples increase for the two islands due to trade? How much would the combined production of pearls increase?

(c) How could both countries produce and consume even more?